As an entrepreneur, what goals will you pursue when you want to transfer your business to a successor?
First of all, you want to get paid for the value you have built up. The proceeds from the sale of the rights to your shares in the company should be your retirement provision. You also want to provide your family with good financial security through the sale. However, you not only want financial recognition for your work, but you also want to make sure that the values you have created are preserved. You also feel a social obligation towards your employees, which you would like to redeem by selling “into good hands”. This includes a certain level of site security.
To fulfil these goals, you need to prepare your company for transfer to new shareholders.
While you have worked in a tax-optimized manner up to now, in the future you should consistently work in an earnings-optimized manner in order to prove the actual earning power over a period of at least two years.
Example: A group of plastics processing companies was to be transferred as part of a succession plan. Although the earnings reported to date were positive, they were far from justifying the selling shareholder’s asking price. Not officially known were the “hidden reserves” that lay in the input material inventories. When an extruded sheet had been cut for a customer order, the rest of the sheet was written off as waste. Thus, considerable reserves of input material had built up that were not kept on the books. The high proportion of input material that was included in the P&L formally reduced earnings. The actual earning value of the company was above the earning value justified by the officially reported figures.
Your company pays the appropriate taxes, but in the sale you profit from the ratio of an EBITDA multiple, depending on the general conditions, especially the industry and the interest rate situation.
In addition, there are a number of suitable levers that can be used to increase reported earnings. Concentrate on activities that directly lead to earnings. Exploit price potential on the sales and purchasing side. Create future security through reliable supply contracts with existing customers. But also initiate new business relationships that promise traceable earnings potential in the future. Measures that are conceivable but not initiated cannot be included in the sales price. These are measures that the buyer will implement and create value for. He will not pay for services he provides.
Look at your company from the perspective of prospective buyers. Your company has grown organically so far, probably without having considered a sale when setting out on its path. With sufficient lead time, you can develop your company to a sales-optimized profile. To do this, consider which skills, which relationships, which technologies, which market accesses and/or which capacities can be well communicated. There may be larger companies in your industry that may be interested in certain qualities in a few years. You can specifically set up your company so that it fits as seamlessly as possible as a complement to such companies. In particular, a clear business and revenue model and a natural integration of the company into its market environment are valued. Also, make sure that your company is operating in a market that will continue to be attractive in the future. After all, buyers are not paying for past successes, but for future success with the purchased company
Example: A wholesale company for technical goods was quite broadly positioned, but had special access to architects, civil engineers and local authorities in the “civil engineering” field, which had grown over many years. These relationships were also very valuable for other companies in the industry, because these target groups are important recommenders and multipliers. Three years before the envisaged succession, the company focused its sales and application engineering activities on consolidating and further expanding precisely these relationships. During the same period, it divested itself of business areas that did not fit in with civil engineering as part of a buyout. These measures enabled the shareholder to sharply tailor his company to the “acquisition strategy” of his competitors. In the end, he received three times the sales proceeds for his company than if he had sold it as it originally stood.
Also, imagine your company without you. You are selling your business without yourself. Prospective buyers will be particularly critical of whether the company can continue to operate without you. Therefore, make yourself expendable. Make sure your business processes are well documented. Give your management team the authority to make decisions. Do not involve yourself significantly in the operational business. The more independent the operational business runs, the higher the value you can offer. Can you rely on the costing that is produced in your business without reviewing it? Is the necessary technical know-how available in your team? Who initiates product developments? Who carries them out? Is controlling independent of your person?
You may plan a succession only once in your life. For you and your family, but also for the employees of your company, this is an important step that must succeed. Let yourself be professionally accompanied by an experienced management consultant during the transaction process.